San Diego Bumps Up Consultant Payments

August 11, 2005 ( - The San Diego City Council has boosted payments to four consulting firms preparing a long overdue 2003 city audit to $15 million even though City Attorney Michael Aguirre fought the move.

Three of the firms are expected to continue their efforts to complete the study of the city’s tangled finances, but one has asked to pull out of the efforts, the San Diego Union Tribune reported.

Arthur Levitt, former chairman of the US Securities and Exchange Commission and a consultant supervising the city’s audit team, told the city lawmakers that the additional costs were in the city’s best interest, and only Aguirre disagreed. According to Levitt, the best case scenario is to complete the audit by year end – a move he said would allow the beleaguered city to resume its borrowing program for capital projects.

“It’s a choice between personal grudges and the community’s well-being,” Levitt told the council, according to the newspaper, “between arguing about the past and finding solutions for the future, between cynicism, skepticism and hope.”

Meanwhile, Aguirre accused Levitt and other consultants from Kroll Inc., a New York-based risk management firm, of helping draft a recent report by Vinson & Elkins that found no criminal wrongdoing by any city employee (See  Internal San Diego Report Clears Officials of Wrongdoing ).

Vinson & Elkins billed the city $6.3 million over 18 months to examine potential securities fraud and disclosure failures by city employees and to represent the city during investigations by the SEC and US attorney.The federal investigations into the city’s finances began after the city acknowledged in January 2004 that it excluded details of its ballooning pension deficit in past bond offerings and a 2002 audit that cost $300,000.

At a news conference following the council’s unanimous vote to authorize the additional $3 million for the three firms, Aguirre suggested the council was covering up for prior illegal actions.

“We’ve got the council spending millions of dollars on East Coast lawyers to try to make it look like they did not do anything wrong,” he said, according to the newspaper. “That’s a complete waste of money.”

Both KPMG and the audit committee say that the fiscal 2003 audit cannot be completed unless the city’s pension board grants access to confidential documents that it has asserted for months are protected by attorney-client privilege.

The audit committee also insists that a new actuary be retained to prepare actuarial reports for the pension system from fiscal 2003 on.

After the contentious matter with its consultants, the council continued a proposal to remove pension board President Peter Preovolos and postponed naming new members to the panel, which last month lost four trustees to resignations. The council will return to the issue September 6.